Dividend Portfolio Final Results

Since interest rates are so low I didn’t want to just renew my CD bond “ladder” and decided instead to take those funds and invest them in a portfolio of dividend stocks. Currently stock dividends are returning more than government debt, which is a very rare occurrence.

Thus I selected a dozen stocks with reasonable yields (between 2% and 5%, I wanted to avoid extremely “distressed” stocks) and with reasonable performance (not a large run up or decline in the last year). The portfolio began in July, 2012.

I could have just bought an ETF that focused on dividends but many of these ETF’s were in the 0.4% or more in terms of expenses, especially since I was looking at a substantial percent of international stocks and it is difficult to find an ETF that covers all of this. Since I had a number of free trades that I had accrued with my brokerage firm, the effective expense ratio of this effort was zero. That saved me about $500 on an annual basis, which is significant when the “net” return is around 1% – 2% on any sort of debt right now that is near risk-free.

What I learned immediately is that dividend stocks are extremely volatile, as are all stocks. Since I was not attempting to select stocks for gains, I made a rule that if stocks went up 15% or down 10%, I’d sell, and then re-buy something else to replace it in the portfolio. This rough rule of thumb said if you got 15% return that was 5 years worth of dividends at 3% / year, which was a gain to take off the table. On the other hand, you didn’t go into this to lose significant amounts of money (remember, this is my CD ladder money as noted above) so I would sell as a “stop loss” rule.

Based on this rule I had very high turnover. In the first 5 months I had sold off 2/3 of my original stock picks. This level of turnover is high for a portfolio that is supposed to earn income, not yield gains or losses.

For a baseline, I used the BND ETF from Vanguard. This isn’t just a baseline, I actually did invest roughly the same amount into that ETF as a core holding at the same time. I plan to keep the BND ETF indefinitely.

Come mid March 2013, I decided to end this experiment. Here are the results:

– for the stocks, a return of about 18% annualized, of which about 85% was capital gains (net of losses)
– for the EFT, a negative return of about (2%) annualized, which is due to a decline in the price which more than offset the returns

The specific stocks are listed on the links sidebar or you can go here.

What did I learn?

I learned that dividends are a relatively small component of a stock portfolio and that return is often dwarfed by other market forces. During this time there was a stock run-up in value so that is what the portfolio move was driven by. It is a fools’ errand to view stocks and income (dividends) from stocks as a replacement for income from an instrument such as a CD, bond, or ETF / mutual fund.

1 Comment

  1. I would agree with your summary in the last sentence if you would have written it like this:

    It is a fools’ errand to view stocks and income (dividends) from stocks as a replacement for income from an instrument such as a CD, bond or EFT/mutual fund *unless you have a long time horizon*. I completely agree that in short term situations the volatility may kill you with the stocks but long term (I am talking at least a half decade here) they beat the tar out of CD’s and Uncle Sam.


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